So is the Dow USD correlation just a technical indicator?

Really when you look around for answers on this issue people really have had no reasoning as to why it happens and all my opinion is people looked at history and saw that euro and dow both just got stronger and its just became some sort of self fulfilling prophecy like any other technical indicator.

The big correlation for the euro can clearly be seen in the dollar index chart. Almost always, if the dollar index chart goes up euro goes down (and vice-versa). I would never trade euro/usd without a dollar index chart. Now..usually when the Dow moves up, the dollar gets weaker so the euro will also move up. However, there are days when the dow and the dollar move in the same direction. On those days, the euro/usd will go the opposite of the Dow. Hope that makes sense.

Is this because the USD index is measuring USD against a basket of currencies but in that basket Euro is very dominant?

Equities/Dollar correlation is due to capital inflows to what is perceived as one of the safest assets, USD. When people are piling out of foreign equities for example (look at what happened today during the European close), money is going somewhere, guess where.

Nothing to do with a self-fulfilling prophesy, it's just market mechanics. On days when risk-appetite returns to the market, generally speaking money is going to flow into assets with higher expected returns, i.e. equities, high-yielders, etc. and out of the USD.

AnonymousC that is correct the USD index is heavily weighted on the Euro

Smittens I couldn't have put it better myself :-)

The correlation between stocksd nd USD all means where traders are putting theior money and from where are they getting.

Typically I have noticed if traders pull money from forex market they put it in stoock. So, if usd is going down, then stock market will be rising..

Here is how I look at it. If you are have a major sell off in the Dow or the stock market like we are experiencing at the moment, then the sellers of these stocks end up with what? Dollars!

So it is just like everyone is out buying dollars and thus the greenback gets stronger due to an increase in demand generated from this sell off and inadvertently its cross currencies get weaker.

May be a simple way of looking at things but It works for me.

Perryg